Saudi Arabia considering ditching the dollar for oil sales to China: report

Saudi Arabia considering ditching the dollar for oil sales to China: report
Oil worker (Shutterstock).

The Kingdom of Saudi Arabia considering abandoning the United States dollar for a significant chunk of its crude oil exports and replacing it with the Chinese yuan, according to an exclusive report in Tuesday's Wall Street Journal.

"The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom," the WSJ explained. "The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year."

Saudia Arabia is the world's leading exporter of oil and the dollar has been the reserve currency for international commerce since the mid-20th century. The bedrock of this paradigm is oil.

"China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China’s currency. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of Saudi Arabian Oil Co., known as Aramco," the paper continued. "It would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars. The majority of global oil sales—around 80%—are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom."

Switching to the yuan would send shockwaves through the global economy and weaken the dollar's exchange value in trading markets. The Journal noted that one of the primary factors fueling the potential change is the souring of relations between Saudi Arabia and the US.

"The Saudi relationship with the U.S. has deteriorated under President Biden, who said in the 2020 campaign that the kingdom should be a 'pariah' for the killing of Saudi journalist Jamal Khashoggi in 2018. Prince Mohammed, who U.S. intelligence authorities say ordered Mr. Khashoggi’s killing, refused to sit in on a call between Mr. Biden and the Saudi ruler, King Salman, last month," the WSJ noted.

Other elements are the diminishing quantities of oil that the US – a net exporter – buys from Saudi Arabia as well as China's surging demand for energy imports.

"The U.S. is now among the top oil producers in the world. It once imported 2 million barrels of Saudi crude a day in the early 1990s but those numbers have fallen to less than 500,000 barrels a day in December 2021, according to the U.S. Energy Information Administration," the WSJ said. "China’s oil imports have swelled over the last three decades, in line with its expanding economy. Saudi Arabia was China’s top crude supplier in 2021, selling at 1.76 million barrels a day, followed by Russia at 1.6 million barrels a day, according to data from China’s General Administration of Customs."

And while one American official said that swapping out dollars for yuan would be “highly volatile and aggressive” and “not very likely," if it were to occur, there would be a substantial impact on the health of the dollar. Conversely, trading in yuan would strengthen the Chinese currency and possibly tempt other nations to follow suit.

"The Saudis still plan to do most oil transactions in dollars, the people familiar with their talks say. But the move could tempt other producers to price their Chinese exports in yuan as well. China’s other big sources of oil are Russia, Angola, and Iraq," wrote the Journal. "The Saudi move could chip away at the supremacy of the U.S. dollar in the international financial system, which Washington has relied on for decades to print Treasury bills it uses to finance its budget deficit."

One expert told the Journal that the foundation of the world's financial system would crack if Saudi Arabia decides to ditch the dollar.

“The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency,” said economist Gal Luft, co-director of the Washington-based Institute for the Analysis of Global Security. “If that block is taken out of the wall, the wall will begin to collapse.”

Read more here (subscription required).

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